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Full text of "Energy and the economy (the economic impact of alternative energy supply-demand assumptions: a study"

95th Congress \ COMMITTEE PRINT [ Committee 

2d Session J I I'uixt ijr>-r>l 



ENERGY AND THE ECONOMY 

(The Economic Impact of Alternative Energy Supply- 
Demand Assumptions) 



A STUDY 

PREPARED AT THE REQUEST OF 

John D. Dixgell, Chairman 

SUBCO^IMITTEE ON ENERGY AND POWER, 

COMMITTEE ON 

INTERSTATE AND FOREIGN COMMERCE 

UNITED STATES HOUSE OF REPRESENTATIVES 

BY THE 

CONGRESSIONAL RESEARCH SERVICE 
LIBRARY OF CONGRESS 










-I 



APRIL 1978 • ^<=^; ^^\ 



Printed for the use of the Committees on Interstate and ,For^f9j>^;P^j^lDe^ce, 

United States House of Representatives, and Energy and Natural Resources, 

Commerce, Science, and Transportation, United States Senate 



U.S. GOVERNMENT PRINTING OFFICE 
22-673 WASHINGTON : 1978 






COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE 

HARLEY O. STAGGERS, West Virginia, Chairman 



SAMUEL L. DEVINE. Ohio 
JAMES T. BROYHILL, North Carolina 
TIM LEE CARTER, Kentucky 
CLARENCE J. BROWN, Ohio 
JOE SKUBITZ, Kansas 
JAMES M. COLLINS, Texas 
LOUIS FREY. JR.. Florida 
NORMAN F. LENT. New York 
EDWARD R. MADIGAN, Illinois 
CARLOS J. MOORIIEAD, CaUfornia 
MATTHEW J. RINALDO, Nw Jersey 
W. HENSON MOORE, Louisiana 
DAVE STOCKxMAN. Michigan 
MARC L. MARKS, Pennsylvania 



JOHN E. MOSS, California 
JOHN D. DINGELL, Michigan 
PAUL G. ROGERS, Florida 
LIONEL VAN DEERLIN, California 
FRED B. ROONEY, Pennsylvania 
JOHN M. MURPHY, New York 
DAVID E. SATTERFIELD III, Virginia 
BOB ECKHARDT, Texas 
RICHARDSON PRE YE R, North Carolina 
CHARLES J. CARNEY, Ohio 
RALPH H. METCALFE, Illinois 
JAMES H. SCHEUER, New York 
RICHARD L. OTTINGER, New York 
HENRY A. WAXMAN, California 
ROBERT (BOB) KRUEGER, Texas 
TIMOTHY E. WIRTH, Colorado 
PHILIP R. SHARP, Indiana 
JAMES J. FLO RIO, New Jersey 
ANTHONY TOBY MOFFETT, Connecticut 
JIM SANTINI, Nevada 
ANDREW MAGUIRE, New Jersey 
MARTY RUSSO, Illinois 
EDWARD J. MAR KEY, Massachusetts 
THOMAS A. LUKEN, Ohio 
DOUG WALGREN, Pennsylvania 
BOB GAMMAGE, Texas 
ALBERT GORE, Jr., Tennessee 
BARBARA A. MIKULSKI, Maryland 

W. E, WiLLUMSON, Chief Clerk and Staff Director 

Kenneth J. Painter, First Assist anl Clerk 

Eleanor A, Dinkins, Assistant Clerk 

WiLUAM L. Burns, Printing Editor 



Elizabeth Harrison 
Jeffrey H. Schwartz 
BRLA.N R. Mora 
Karen Nelson 



Professional Staff 

Ross David Ain 
Christopher E. Dunne 

WILLL4.M M. KITZMILLEE 

Mark J. Raabe 
Thomas M. Ryan 
Lewis E. Berry, Minority Couruel 



Subcommittee on Energy and Power 
JOHN D. DINGELL, Michigan, Chairman 



CLARENCE J. BROWN, Ohio 
CARLOS J. MOORIIEAD, California 
JAMES M. COLLINS, Texas 
W. IIENSON MOORE, Louisiana 
DAVE STOCKMAN, Micliigan 
EDWARD R. MADIGAN, Illinois 
SAMUEL L. DEVINE, Ohio (ex officio) 



RICHARD L. OTTINGER, New York 
ROBERT (BOB) KRUEGER, Texas 
PHILIP R. SHARP, Indiana 
ANTHONY TOBY MOFFETT, Connecticut 
BOB GAMMAGE, Texas 
JOHN M. MURPHY, New York 
DAVID E. SATTERFIELD III, Virginia 
TIMOTHY E. WIRTH, Colorado 
ANDREW MAGUIRE, New Jersey 
MARTY RUSSO, Illinois 
EDWARD J. MARKEY. Mas.sachusett3 
DOUG WALGREN, Pennsylvania 
ALBERT GORE, Jr., Tennessee 
HARLEY O. STAGGERS, West Virginia 
(ex ofilcio) 

Fbank Ml Potter, Jr., Staff Director and Counsel 

(n) 



CONTENTS 



Page 

Letter of transmittal v 

Summary 1 

Introduction 3 

U.S. energy demand, 1950-76 3 

The energy scenarios 10 

Base case 12 

Conservation case 13 

High electric case 13 

High oil cases 14 

Some caveats 14 

Economic impacts 15 

Employment and unemployment 18 

Inflation 19 

Investment 19 

Personal consumption 20 

Foreign trade 21 

FIGURES 

1. Consumption and price of energy, 5-year averages, 1947-76 4 

2. Energy consumption by sector, 1950-75 5 

3. Electric generating productivity 6- 

4. Household ownership — cars and appliances 8 

5. Productivity of transportation energy ^ 

6. Energy productivity indices Id 

TABLES 

1. Energy consumption, 1976 and 1990, by case 12 

2. Energy supply, 1976-90, by case 15 

3. Summary economic impacts, 1976-90 17 

4. Employment and unemployment in the United States, 1977-90, by 

energy scenario 18 

5. Estimated fixed investment by sector, 1976-90, billions of 1972 dollars.. 20- 

6. Estimated personal consumption expenditures, 1976-90, billions of 1972 

dollars 21 

7. Exports and imports, 1990, billions of dollars 21 

Appendix — Other energy models 23. 

(m) 



Digitized by the Internet Archive 
in 2013 



http://archive.org/details/energyeconomytheOOunit 



LETTER OF TRANSMITTAL 



The Library of Congress, 
Congressional Research Service, 

Washington, D.C., February 2, 1978. 
Hon. John D. Dingell, 

Chairman, Subcommittee on Energy and Power, Committee on Interstate 

and Foreign Commerce, U.S. House of Representatives, Washington^ 

D.C. 

Dear Mr. Chairman: In your letter of March 22, 1977, you asked 

that we prepare a study of alternative energy supply scenarios, the 

resulting energy prices, and the impact of those scenarios on the U.S. 

economy. In fulfillment of that request, I am enclosing a study entitled 

''Energy and the Economy." The delay in preparing the report v»'as 

necessitated by a shortage of computer funds. 

The report evaluates the impacts of five energy cases on the econ- 
omy. These include a base case, as well as conservation, high electric 
and two high oil cases. The assumptions in each of these cases were 
tested for economic impact using the Wharton energy model. 

''Energy and the Economy" was prepared by Mr. Alvin Kaufman, 

Senior Specialist in Business Economics (Resources and Regulation) ; 

Dr. Warren E. Farb, formerly with our Economics Division; and 

Ms. Barbara Daly, Research Assistant (Resources and Regulation). 

Sincerely yours, 

Gilbert Gude, 

Director. 

(V) 



ENERGY AND THE ECONOMY 

(The Economic Impact of Alternative Energy Supply- 
Demand Assumptions) 

(By Alvin Kaufman, Senior Specialist in Business Economics (Re- 
sources and Regulation) ; Warren E. Farb, Specialist in Macro- 
economics ; and Barbara Dal}^ Research Assistant in Resources and 
Regulation) 

Summary 

Energy consciousness over the past few years has heightened in the 
United States. The President called in April 1977, for the country to 
deal with the situation with the fervor of the ''moral equivalent of 
war." However, the debate continues in the Congress and elsewhere 
as to how this "war" is to be fought. The paths the country has before 
it are varied and reflect differing priorities. There are many choices 
to be made concerning the country's goals and also the way in which 
it sets out to reach these goals. 

The Congressional Research Service in this study has outlined five 
possible energy scenarios which exemplify different options and prior- 
ities. Included are a reference case, a high electric use case, two high 
oil cases (limited imports and high imports), and a conservation case. 
Through the cases this paper attempts to assess the economic response 
to various methods of meeting our energy demand through 1990. 

Projected end use energy consumption in 1990 ranged between a 
low of 96 quads in the conservation case to a high of 108 in the base 
case. Annual average growth rates thus ranged from 1.9 to 2.7 percent. 
Imported energy comprised 23 percent of total consumption in the 
high electric case and ranged up to 35 percent in the high oil import 
case. Prices for the primary sources of energy were, for the most part, 
determined exogenously. 

According to these scenarios the high electric case is expected to 
generate the strongest domestic economy over the long run; reliance 
on energy conservation through high energy prices shows the weakest 
results. Reliance on imported oil would also result in a relatively 
weak domestic economy. As a group, the alternative forecasts indi- 
cate that as long as energy is available in the forms and quantities 
assumed in the simulations, and there are no unforeseen shocks to the 
system such as the 1973-74 OPEC price increases, the flexibility of the 
economy, as interpreted by the model, would minimize the economic 
differences flowing from the various energy source assumptions. 

Unemployment levels indicated for all cases are substantially 
lower than today's 6-7 percent level. Unemployment can be main- 
tained at a relatively low level, according to the model, due to the 
projected sharp decline in the labor force growth rate. This in itself 
can be disputed and is somewhat deceptive, as indicated in the paper. 

(1) 



Most of the differences in the forecasts of economic growth occur 
after 1980 when the variances in the rates of investment spending 
are most pronounced. The average real growth rates of GNP to 1990 
range only from 2.5 to 2.8 percent per year. 

It must be noted that projections are based on an interpretation 
of the present, and how we view the future from within this frame- 
work. Thus the degree to which one can accept these results is based 
on the extent to which one agrees with the CE-S assumptions and the 
structure of the Wharton energy model used to test these assumptions. 



ENERGY AND THE ECONOMY 

(The Economic Impact of Alternative Energy Supply-Demand 

Assumptions) 

Introduction 

Severe winter weather in 1976-77, and the consequent shortages 
of natural gas, fuel oil and electricity in many areas of the United 
States has raised the energy consciousness of the country. This 
consciousness has been further heightened by the President's call 
for the ''moral equivalent of war." One's perception of the need for 
and the kind of war, however, is dependent to a considerable extent 
on one's perception of the direction and velocity of future energy 
demand, as well as one's value system. 

These perceptions color the assumptions upon which all forecasts 
are based. Assumptions are the product of insight and intuition heavily 
influenced by a vision of the future based on a conception of the 
present. In short, if times are hard, forecasts will tend to be gloomy; 
if times are good, they will tend to be overly optimistic. The above 
can be further summed up by noting that no one can forecast the 
future with confidence; there is always a strong element of risk 
and uncertainty. If we do sometimes turn out to be right, it is prob- 
ahlj for the wrong reason (s). Despite the limited accuracy of long- 
term economic forecasts, they are a useful exercise in that they can 
provide a target or goal for policy formulation as well as an insight 
into possible reactions to various alternative proposals and assump- 
tions. 

It is in this spirit that we have developed several energy scenarios, 
and attempted to measure the impact of these on our economy. 
Before looking at where we may be heading, however, it may be 
useful to see where we have been. 

U.S. Energy Demand, 1950-76 

In 1973 the Arab nations imposed an oil embargo that did more 
harm to our national ego than to our economy. At approximately 
the same time OPEC raised oil prices to a level that is resulting in 
a massive income transfer from the energy consuming countries 
to the energy producing countries. The long-term impacts of this 
tax-like situation are still not clear. The short-run consequence 
of these actions, however, together with a coincident decline in 
economic activity, was a drop in energy use from the record high 
in 1973. Current data indicate that energy consumption may have 
resumed the march upward, since consumption in 1976 was some 
4.8 percent above 1975, although it is still 1 percent below 1973. 
The 4.8 percent rate of growth is substantially above the post- 
World War II (1950-76) growth rate of 3 percent per year, but is 
in line with the 1965-70 rate of 4.7 percent annually. 

(3) 
22-673—78 2 



4 



Throughout the post-war period, consumption has grown at a 
relatively smooth upward pace with a shift to a somewhat steeper 
slope in the early 1960's (fig. 1). This increase was encouraged by 
rising real income coupled with declining real price. From the graph, 
however, it is apparent that real price and consumption of energy 
are closely related. 

In order to more clearly illustrate this relationship, we have used 
5-year averages to smooth out the annual fluctuations that have 
occurred in both energy use and price. For example, energy growth 
in the 1973-75 period was negative, but the average for the 5-year 
period, 1972-76, followed the past trend. During this same period, 
prices rose to record highs implying that consumption has not re- 
ponded in the latest 5-year period to the price signal. 

Figure 1 

Consumption and Price of Energy, 
Five Year Averages, 1947-76 




57 62 

Year 
Sourca: Energy PerspectivM 2, MS. Dspaitmtnt of jntatior, Jun* 197S, p. 63 & 89. 



77 



The lack of response should not be taken as an indication that energy 
use will fail to react to rising energ};^ costs, but rather as an indicator 
that it takes time to turn things around. Constantly declining energy 
prices over several decades has encouraged the creation of an inventory 
of relatively energy inefficient houses, cars, and equipment that w;in 
take years to replace or upgrade. 

The initial impact of conservation measures, whether induced by 
price rises, taxes or government fiat, will be minimal. These impacts, 
however, will tend to increase at a geometric rate over time as items 
of equipment are replaced with more energy efficient equipment. 

Energy growth occurred in all economic sectors in the post- World 
War II period, but not at equal rates. For example, as shown in figure 
2, the household-commercial and transportation sectors rose at 3.2 
and 3.3 percent annually between 1950-76, while the industrial sector 
grew at 2.4 percent. As a consequence of these differential growth 



rates the shares of total enercj^y consumed by each ecoQomir. sector 
shifted during the period. The industrial sector, inchidin^ nonfuel 
uses, accounted for 38 percent of energy use in 1950, but only 29 per- 
cent in 1976. The household-commercial and transportation scttor 
maintained their shares at approximately one-fourth each throughout 
the period. 

If one were to look at net energy, however (that is total energy 
consumed less conversion losses), a somewhat different picture would 
emerge. The industrial sector would still have decreased its share, 
while the household-commercial and transportation sectors would 
increase from one-fourth each to approximately one-third during the 
26-year period. These changes reflected the increasing electrification 
of the household-commercial sector and the increasing inefficiency of 
the transportation sector. 



Figure 2 



Energy Consumption by Sector 1950-75 



80 



70 r- 
60 



i 


50 


K 




O 




^ 


40 


•c: 




§ 


•^n 



ri/C^^ 



'^0^^B^ 





Non Fiitl L'ses 



l^csst^fd" Fj^S Use. 



; ^ous&h&kl B- Ccmmsi-ciai ' 



^ \ \ 



yjMi 



1950 



60 



Year 



70 72 74 76 



I del) 

$oyirc9: Eiierav ^arspectfv^ Z USPl p. 6S. 67. 78, 206. £r H&vtis Retaase 3/14/77. 
Annuai U.S. Ersarcy U** hn '597€. 

In computing these figures, consumption of energy in the form of 
electricity was counted at its output value. The losses incurred in the 
conversion of primary energy sources to electricity were counted sep- 
arately. Such losses increased at approximately 4.7 percent per year 
between 1950 and 1976, so that by 1976, conversion losses accounted 
for 19 percent of total energy compared with 13 percent in 1950. This 
substantial increase reflected the steady electrification of the Nation, 
as well as a stabilization in generating efficiency. 

Between 1950 and 1975 the number of kWh of electricity produced 
by a unit of heat increased at an average rate of 1.5 percent per year. 
There was virtually no improvement in the 1965-75 period, however, 
indicating an even higher rate of improvement in the 1950-65 era 
(fig. 3). 



6 

The flattening of the generating productivity curve during the past 
10 years has been the result of the imposition of strict environmental 
requirements, introduction of a new technology in terms of higher 
operating temperatures and pressures, and elongation of the planning 
cycle. As these difficulties shake-out and as the technology for pro- 
ducing electricity continues to improve, there should be renewed im- 
provement in conversion efficiency. 

In the 1975-76 period, electric utility conversion efficiency has 
shown a substantial improvement, but we do not know if this will 
continue, or if it is simply an aberration in the curve. Although one 
year cannot indicate a trend, it is likely that the rate of conversion 
efficiency has resumed its upward march, albeit at a slower pace than 
before. 

Figure 3 

Electric Generating Productivity 



120 I- 

100 



Generating Productivity 



1 

! 80- 

X I— -.« 

1 40 P 



20 



.^f*" Net Generation 



1980 



®S 



70 72 



74 



7S 



Year 



Scurss: Energy P^rsixactivM 2. USOI. p. 73 & 1^. 

The importance of improved conversion efficiency to overall energy 
use can best be appreciated by considering the primary energy needs of 
the electric utilities under alternative rates of conversion improvement. 
If electric consumption were to grow at an average rate of 5 percent 
per year for the next 15 years, close to 4 trillion kilowatt hours would be 
required in 1990 compared with the present 2 trillion. This expansion 
in the demand for electric energy could be satisfied by a heat input of 
approximately 40 quadrillion Btu (Q) if the heat needed to i)rodiice a 
kWh (boat rate) declined 0.1 percent per year. Some 3 Q, or 1.5 million 
barrels of oil equivalent per day could be saved, however, if the heat 
rate improved at approximately half the historic rate, or 0.7 percent 
annually. There is a theoretical limit to the efficiency of this conversion 
process, and we may well be pushing hard against it. As a consequence, 
improvements such as indicated above may be hard to come by. 



As the consumption of clectricit}^ rises, energy in])ut re(iiiirenients 
will also rise, but at a faster pace if generating efliciency does not 
improve because a larger quantity of the input will be wasted. 

If efficienc}^ can be improved, this waste from conversion losses can 
be reduced. Losses, however, may well increase in the future even with 
improved generating efficiency, due to our continuing need to turn to 
lower-grade sources of energy and because of increasing environmental 
restrictions. For example, the more we are foi'ced to ])roduce oil 
through secondary or tertiar}^ recovery methods, the greater the 
investment of energ}^ in order to produce energy. A further shift from 
eastern coals to western coals will have a continuing serious impact 
on losses, since it takes approximately the same quantity of energy to 
produce a ton of western coal, but those coals have a lower heat content 
and thus ^deld less energy than most eastern coal. Using eastern coals 
with scrubbers will also impose an energy penalt}^ 

Greater processing requirements in the future are also possible. For 
example, more extensive cleaning of coal to remove pyritic sulfur will 
consume more energy. The production of fluids from coal carries v/ith 
it greater conversion losses than at present. Output of low-lead gaso- 
lines means the use of more crude oil to yield the same usable energy. 
Thus, the outlook for the future is for a greater disparity between 
gross energ}^ consumption and final demand despite improvements in 
electric utility generation. The conversion losses will be transferred 
from the electrical generating sector to the primary energy producing 
sectors, since the bulk of the losses will tend to occur back at the mine 
or wellhead rather than at the generating station. In short, barring 
some kind of technical breakthrough we vv^ill have to run faster and 
faster to stay in the same place. 

This situation is further compounded by the growth of appliance 
o\\Tiership over the past 13 to 14 years in the household-commercial 
sector, as well as by an increase in electric heating and air-conditioning. 
The proportion of households owning various appliances grew 
dramatically in the 1960-74 period, with the exception of washing 
machines (fig. 4). The latter declined during this period primarily as a 
result of the trend toward single-individual households and young 
couples living in apartments. These types of households generally use 
common or commercial clothes-washing facilities. In addition to the 
increased use of appliances is the fact that 49 percent of the houses 
built in 1974 were electrical^ heated and 48 percent were air-con- 
ditioned. This preponderance of electric space conditioning will result 
in greater future energ}^ use since the higher efficiency at the point of 
use is often more than ofi'set by conversion and transmission losses 
compared with other heating sources. This situation may be mitigated 
substantially by the widespread use of heat pumps rather than re- 
sistance heating. It should be noted, however, that the use of elec- 
tricity in the household-commercial sector has increased close to six- 
fold between 1950 and 1975, and all indications point toward continued 
increases in electric usage in that sector of the economy. 



Figura4 

Household Ownership - Cars & Appliances 

Percent of U.S. Households 




Aff 


Cblhes 


BMi' Refrig- 


Waging 


ConcS- 


Drysr 


W3sh8f erator 


f^{;tiine 


tm& 









Two w 

More 

Cars 



Giie or 

More 

V&Tildes 



SOURCES; StttJsticaJ Abstract of U.S. 1975. p 406 & 1976. p. 434. 



Figure 4 also illustrates that there has been a substantial growth in 
the proportion of households owi^iing one or more vehicles between 
1960 and 1974, as well as a virtual doubling in the percentage of house- 
holds owning two or more cars. Not only do we have more automobiles, 
but the bulk of the automobiles currently being produced are equipped 
with energy-consuming options. In 1975, approximately 92 percent 
of the automobiles produced were equi])ped with automatic transmis- 
sions, 90 percent with power steeling, 76 percent with power brakes, 
73 percent with air-conditioning and 71 percent with V-8 engines. 
These numbers represent substantial increases over 1960. For example, 
in that year only 7 percent of the cars produced were air-conditioned. 

Adding to the energy im})act of these options was the installation 
of pollution-abatement equipment. These two trends resulted in a 
decline in the overall vehicle efficiency from 12.4 miles per gallon in 
1960 to 11.9 in 1973 (fig. 5). During this same period, passenger car 
efficiency dropped 8 percent from 14.5 miles j)er gallon to 13.3. At the 
same time that efficiency was declining, miles chiven doubled from 
719 billion vehicle miles m 1960 to 1.4 trillion in 1975. 



Figure 5 



Productivity of Transportation Energy 



100 



8 



£ 80 



60 



Avg. Miles Per Caifon 



Transpostation Energy* 
Productivity 




Vehicle Miles Traveied 



J_i I I ? 



1960 



65 



70 72 74 76 



Year 



Since 1973 both vehicle and automobile efficiency have improved. 
This trend should continue as the Natioi\ moves toward the use of 
lighter and smaller cars in the future, although better mileage \\dll con- 
tinue to be offset to some extent by more miles driven. An indication 
of the importance of improved vehicle efficiency is available from the 
following computations. If the 135 million vehicles on the road today 
had an average efficiency of 20 miles per gallon instead of 12, gasoline 
consumption would be over 4 million barrels per day less. If the effi- 
ciency was 16 miles per gallon, the savings would be close to 3 million 
barrels per day. It is likely that vehicle efficiency will continue to im- 
prove for at least the next several years as a result of the legal require- 
ment for more effxcient cars, coupled with the push for mass transit and 
other energy saving transportation options. 

The result of the various trends discussed earlier was a rather sub- 
stantial increase in energy productivity in the 1960-67 period, follow^ed 
by a decline to 1970 and a rise to new highs since that year (fig. 6). 
Productivity is the output derived from a unit of energy input. The 
productivity of gross energy has been improving at a slower rate com- 
pared with net energy since 1972, reflecting the increased importance 
of conversion losses from electric utility plants in the overall energy 
picture. The household-commercial sector, on the other hand, sub- 
stantially increased its productivity since 1970, reflecting improved 
efficiency of appliances, the use of insulation, and other measures to 
cut energy usage in response to higher energy prices. Improved energy 
efficiency in this sector results in a double bang for the buck due to its 
orientation toward electricity. A reduction in the need for electricity 
also reduces conversion losses. 



10 



Figure 6 

Energy Productivity indices 




In summing up, it may be of importanceTthat gross energ}^ produc- 
tivity improved during a time when energy prices were declining. 
This would seem to indicate that improved energy efficiency may be 
impacted more by factors other than price, such as the introduction 
of new technology and processes which tend to be energy efficient 
more by accident than by design. From the foregoing discussion it 
would appear that more bang for the Btu could be^obtained by im- 
proving the efficiency of the vehicular fleet and the electric utility 
industry than by any other measure. 

The Energy Scenarios 

Having briefl}' recounted where we have been, we can look at where 
w^e may be going. In order to do so, five possible energ}^ scenarios 
have been developed. These include a reference case, a high electric 
use case, two high oil cases, and a conservation case. 

In order to test the imi)act of these scenarios on the energ}^ sector 
and the U.S. econom}^, the Wharton Econometric Forecasting Associ- 
ates, Inc. (WEFA) Annual Energy Model was used. This particular 
version of the WEFA model while based on their annual long-tei'm 
forecasting model, is still in the development stage. The principal 
difference between the standard long-term model and the energ3^ 
version is the addition of a detailed energy sector. To achieve this, 
the mining sector of the annual model, which includes most energy 
production, has been expanded to s])ecifically forecast crude petroleum, 
natural gas and coal jjroduction. In addition, the output of electric 
and gas utilities, as well as oil refineries, has been segregated and a 
forecast prepared. This greater level of disaggregation is then cai'ried 
through the economy allowing estimates of energ3' consumj)tion to 



11 

be developed. The current form of the model does not permit estima- 
tion of energy use by intermediate users such as electric utilities, 
althougli the model estimates gross demand for energy and some final 
demands. 

Most of the prices for primary soinxes of energy, such as natural 
gas, coal, and crude petroleum, are determined outside of the model. 
Prices of secondary forms, such as electricity, gas, and oil refinery 
products are determined within the model but, as was necessary for 
the high electric alternative, can be modified to achieve specific 
results. In our case the different energy simulations wei-e accornjjlished 
by making changes in the various energy prices from their baseline 
levels. In addition, it was necessary to change taxes on certain energy 
inputs which in effect alter the prices for some of the alternative energ\' 
sources. 

The ])rice changes needed to meet our assumptions were computed 
b}' WEFA. These, as a consequence of the implicit assumi)tions in the 
model, do not ])roduce a constant relationship between ])rice changes 
and consumption, nor is there a one for one change. For example, in 
the case of peti oleum a 5.6 percent annual average incre tse in price 
between 1976 and 1990 results in a 2.6 percent per year annual in- 
crease in consumption in the base case; a 9.2 percent annual rise in 
price in the high electric case suppresses consumption to a 2.0 percent 
annual increase. In uie latter case this implies that a 10 percent 
increase in price will allow a 2.2 percent rise in consum.ption, vhile in 
the base case a 10 percent price rise permits a 4.6 ])ercent i i^e in con- 
sumption. 

Compared with the base case the relationship in 1990 would be as 
follows : 





Percent increase from the 
base case 


Case 


Price 


Consumption 


Conservation... 


_ 31 


-7.3 


High electric 


59 


-8.8 


High oil — Domestic _ 


__ 16 


-3.1 


High oil— Imports 


16 


-1.6 









These and other changes work through the model by affecting the 
supply and demand for the several energy products, and by affecting 
the relative prices among the various substitute energy commodities. 

Additional adjustments to the model have been made as necessar^^ to 
be sure the results are consistent with available a priori knowledge. 
Where taxes are required to achieve a particular goal, the receipts are 
recycled through the economy to avoid sharp economic changes. Mon- 
etary policy assumptions have also been adjusted where needed to 
avoid unreasonable tightness or ease in the financial markets, as 
well as to influence the cost of capital and investment decisions. 

The various assumptions made in each case together with the 
computed energy estimates (table 1) follow: 



22-673- 



12 

TABLE 1— ENERGY CONSUMPTION, 1976 AND 19S0, BY CASE 







1990 estimated 








Base 


Conser- 
vation 


High 
electric 


High oil 




Actual 

1976 


Domestic 


Imports 


74 
I) 


108 
2.7 


96 
1.9 


1 113 
3.1 


97 
2.0 


97 
2.0 






19 


24 
18 

9 
46 

3 


20 
17 
11 
48 
4 


24 
15 
17 
41 
3 


19 
17 
11 

49 

4 


19 


27 


17 


3 


11 


47 


49 


4 


4 






20 


31 


27 


23 


30 


35 







Total consumption (Q) 

Average growth rate 1976-90 (percent) 

Percent of total consumption: 

Coal 

Natural gas... 

Nuclear 

Petroleum 

Other 



Imports. 





Index, 


1976 = 100 






165 
188 


233 
198 


170 
154 


233 
191 


233 
186 


245 
214 


245 
280 


245 
340 


245 
248 


245 
248 



Electricity consumption (billion kilo- 
watt-hours) 2,040 4,050 3,653 6,011 3,664 3,676 

Electricity growth rate (1976-90) 
(percent) 5.0 4.1 7.5 4.2 4.3 

Energy prices: 

Price 

Coal (per ton) $20.00 

Electricity (per kilowatt-hour) 2. 9)4 

Natural gas (per thousand cubic 

feet) $ 0.90 

Petroleum, crude (per barrel)... $13.50 

' Uncorrected for improved efficiency required to permit elecric prices to decline. When corrected total energy con- 
sumption would be 107Q. 

Base Case. — This case is essentially a high energy growth case 
except that electricity consumption was constrained to a 5 percent 
annual growth rate. It was further assumed that there were no supply 
constraints and that energy prices would rise at a relativel}^ moderate 
pace over the 14-year period. Coal prices would be up 65 percent, 
electricity 88 percent, natural gas 145 percent, and petroleum 114 
percent compared with 1976. 

As a consequence of these price assumptions, total energy consump- 
tion is projected at 108 quads by 1990, indicating an annual growth 
rate of 2.7 percent.^ The base case gro^vth rate compares favorabl}'' 
with the 3 percent growth experienced during the post World War II 
period. The lower rate results from conservation induced b}' price, as 
well as anticipated slower economic growth. The latter should occur 
because of demographic changes, the increased importance of services 
and environmental constraints. 

The energy mix in 1990 is expected to be somewhat different than 
in 1976, although oil will continue to provide close to half our energ}^ 
needs. Approximate!}^ two-thirds of our petroleum needs will be 
imported, resulting in 31 percent of our total energy consumption 
comprising imports, compared with 20 percent in 1976. The imports 
include crude petroleum, residual fuel oil, various other products, and 
a snaall quantib,^ of liqu'fie.l natural gas (LMG). The major shifts in 
energy mix, however, are expected to include a decline in the impor- 
tance of natural gas, and increased use of coal and nuclear sources. 
Nonconventional sources, such as solar energy, are not expected to 
substantially contribute to our overall energy needs in the relatively 
short time frame of 14 years. 



1 Those results are compjirable to those of a 1976 CHS study that used the Data Resources 
Inc. (DRI) energy model. See Kaufman, Farb, Daly. Ch. II. U.S. Energy Demand Forecast, 
1970-90 in Project Interdependence : U.S. and World Energy Outlook through 1990. 
Committee Print 95-33. November 1977. 



13 

Conservation Case. — The conservation case assumes that the inipaf ts 
of existing legislation such as the Energ^^ Pohcy and Conservation 
Act are carried through 1980 and that domestic petroleum j)rices 
follow the dictates of that legislation. Natural gas prices are main- 
tained at a $1.45 per thousand cubic feet (mcf) through 1980, and 
then are permitted to rise at an annual .'k7 percent rate. ( oal pieces 
are assumed to move in correlation with oil prices to H)80 and then 
remain virtually constant. Nuclear luei prices are assumed to in- 
crease at an annual rate of 13 percent; crude oil prices arc postulated 
to rise, in real terms, at between 0.5 to 1 percent a year. 

As a consequence of these assumptions, total energy use is estimated 
at 96 quads which indicates an annual growth rate of approximately 
1.9 percent between 1976 and 1990. The energy mix in this case is 
somewhat different than that estimated for the base case. Petroleum 
contributes a somewhat higher proportion of the total than in the 
base case, but energy imports are a lower proportion. It is assumed 
that the higher oil prices w^ill stimulate domestic output and depress 
demand resulting in a lower import requirement, although these 
sources will still supply over half of our petroleum. 

Coal contributes approximate!}^ the same percentage of our needs 
as in 1976, but less than in the base case ; natural gas declines reflecting 
the substantially higher prices and suppl}^ constraints, while the 
proportion of energy derived from nuclear sources increases dramati- 
calh^ compared with 1976. Consumption of electricity^ grows at 
barel}^ more than 4 percent annuall3^ 

High Electric Case. — The high electric case assumes that electricit}^ 
consumption will follow the long-term trend and double ever}^ 10 
years. The bulk of the incremental electric output will be generated 
by nuclear and coal units in this case. To achieve this result, crude oil 
prices were increased at an 8 percent annual rate while the real price 
of eiectricit}^ was assumed to fall by approximately 1 percent p»er 3^ear. 
In addition oil and gas inputs to electric utilities were taxed in order 
to make these noncompetitive with other fuels. 

In the high electric case, prices were adjusted to insure conversion 
to electric generation without regard to other potential factors affect- 
ing energy prices, such as the impact of the huge increase in nuclear 
generation on uranium prices. Also, for the high electric case, the 
Federal Reserve's discount rate was increased by one-half of 1 percent 
(50 basis points) in order to increase the cost of capital. The higher 
capital costs have the effect of making nuclear energy more expensive, 
preventing the system from over-stimulating nuclear generating 
capacity and maintaining more reasonable spreads between long- and 
short-term interest rates. The model structure, however, internally 
allocates the necessary investm^ent spending for new electric generat- 
ing capacity. 

The result of these manipulations is an estimated energy consump- 
tion in 1990 of 113 quads indicating an annual average growth rate in 
excess of .'] percent. This is achieved by a rather dramatic increase in 
the contribution of nuclear energy compared with the base case. The 
proportion of energy derived from coal is the same as in that case, but 
oil consumption is only slightly higher than in the conservation case. 
As a consequence, oil contributes 41 percent of our energy needs in 
this case, and energy imports are only 23 percent. Oil imports, in this 
case, are only 600,000 barrels more per day, or 0.4 percent, than in the 
conservation case. 



14 

In considering this case, however, it sliould be noied that the price 
assumptions imply an improvement in electrical technology that will 
permit the price of electricity to decline over the period. This implicit 
assumption, however, is not reflected in the energy inputs to the 
electric utility industr}^ so that gross energy in the high electric case 
would be less than indicated above. 

The price assumptions implicitly assume improvement in the heat 
rate at one-half the historic rate, or 0.7 percent per year. At that rate 
the primar}" consumption of energy would decline by 6 Q, so that total 
energy use in the high electric case would be 107 Q, or approximately 
equal to the base case. It would thus appear that the high electric 
case could result in reduced energy imj^orts, and a total energy con- 
sumption no greater than that case. In relation to the conservation 
ca'^e, energy imports would be less. If the 6 Q saving were prorated 
among all sources, imports in tlie high electric case would be 5 percent 
less than the conservation case. On the other hand if the full savings 
could be attained at the expense of imports, these would be 23 percent 
below the conservation case. 

High Oil Cases. — The high oil cases were broken into two parts. In 
the one instance it was assumed that imports were limited, and that a 
substantial portion of our oil requirements would be achieved through 
domestic production such as increased oft'-shore output, or through 
the production of shale oil or liquefaction of coal. In the second in- 
stance, it was assumed that the bulk of our oil needs would be obtained 
through imports. 

The WEFA model, however, does not have a jnechanism to miike 
such a distinction. To overcome this difficulty the price assumptions 
in each instance were the same, but in the high oil-domestir case the 
model was adjusted so that the mcremental increase in energy sup- 
plies is produced domestically and reflected in the output of the 
mining sector. In the high oil-imports case the increment is assigned 
to imports. 

The assumptions made in each case included removal of all gasoline 
taxes, imposition of an environmental tax on coal consumption by 
electric utilities increasing at 10 i^ercent a 3'ear, aid ai\ increase in 
domestic crude oil prices to reach $12 by 1980. Dom-estic crude prices 
weie then held constant from 1980 to 1990. 

As a consequence of these assum.ptiOi\s, consumption is estimated at 
97 Q, or roughty equal to that forecast for the conservation case. This 
occurs because of the relatively high energy' ])rices coupled wdth a 
shift from electric heating to oil heat. The latter results in savings in 
conversion losses at the gen.erating ])lant, thus contributing to a re- 
duced enei-gy requirement. This is reflected in an electric consum])tion 
growth rate approximately equal to the conservation case. 

The comi)0^iticni of energy use in each case is ideu.tical, the only 
(lifl'ei-ence being the level of imj)orts. In either case, the level of im- 
jjoi'ted energy is rather high, accoup.thig for :^0 to o5 percent of our 
energy needs. 

Close to half of our energy would be derived from oil, with coal 
(h'0])j)ing fiom approximately one-fourth in the referen.ce case to on.e- 
fifth i)i. the high oil cases. Greaiei' reliance would be placed on u.uclear 
on.erg}'- in these cases than, in the base case. 

S()//i( Caveats. — The Ave cases as outlined are (le])er.dent on. our 
ability to expand coal and nuclear output sufhciently to achieve the 



15 

stipulated goals (table 2). If this co.n be acliioved, oil output would only 
have to increase between 22 and 32 percent ((lependin.<r on the ca^e) by 
1990 compared with 1976. Natural gas supply, including imported LXG 
is postulated to decline u]) to 20 percent, and thus cannot be counted 
on to pick up any shortlall. 



TABLE 2.-ENERGY SUPPLY, 1976-90, BY CASE 






1990 


Conser- 
1975 Base vation 


High 
electric 


High oil 


Domestic Imports 



Domestic supply: 

Coal (million ton-;) 597 

Natural gas (trillion tons cubic feet) 19.8 

Domestic 18. 9 

Imports 0.9 

Nuclear (billion kilowatt hours) 190 

Petroleum (million barrels, per day) 17.4 

Domestic 10.3 

Imports 7. 1 

Other (quads) 3.5 



1,114 


£24 


1,193 


811 


802 


19.9 


16.3 


16.6 


16.1 


15.8 


16.7 


13.8 


14.1 


13.6 


13.3 


2.4 


2.5 


2.5 


2.5 


2.5 


938 


957 


1848 


985 


957 


23.0 


21.6 


21.3 


22.4 


22.7 


10.7 


11.0 


10.7 


10.1 


8.1 


12.3 


10.6 


10.6 


12.3 


14.6 


3.5 


3.5 


3.5 


3.5 


3.5 



In none of the cases have we made any assumption in regard to solar, 
wind or other nonconventional energA^ sources. We feel the ability of 
such sources to contribute to our energy needs is severely limited over 
the timeframe with which we are concerned. In no case, however, 
would we envision that these new technologies could contribute more 
than 3 to 4 Q in total by 1990 because of the la^s in the system. We 
would regard that forecast as extremely optimistic. 

Our case estimates call for an increase in coal production ranging 
between 34 to 87 percent over the 1976 level. Such increases appear to 
us to be difficult at best unless the institutional and economic problems 
inhibiting expansion of these industries can be solved. 

On the nuclear side the economic issues revolve around the rising 
capital cost of such units and their availability. The major problem, 
however, may be the long lead time required to build such plants, plus 
strong opposition by some elements of the public. It can take from 10 
to 1*^ years to build a nuclear plant because of regulatory delaA^s, 
environmental reauiremcnts, and law suits. In addition, low electrical 
load growth in 1975-76 caused the cancellation of plants. As a result, 
orders for new nuclear plants have declined.^ 

The impact of the decline in new plant orders on our ability to meet 
the nuclear capacity requirements postulated for 1990 is still uncertain. 
As of June 30, 1977, there were 67 nuclear units licensed to operate, 89 
being built, 54 planned with reactors ordered, and 22 others planned 
without reactors ordered. These 232 plants have a total capacit}' of 
231 million kW. If all of these are in service by 1G90 and operate at a 60 
percent capacity factor, nuclear output would total 1,213 billion kWh 
in that year, or more than enough to meet the estimated requirement in 
all of our cases except the high electric case. Even if the 22 reactors 
planned but not ordered die on the drawing board, nuclear output 
(1,073 billion kWh) would still be enough in 19C0 to satisfy most of our 
case needs. 



1 Wall street Journal, "Firms That Make Nuclear Power Plants Expect Slump In New 
Orders To Continue," Nov. 30, 1977, p. 24. 



16 

There is, however, a high probabihty that some of the units under 
construction may not come on hne on the targeted date or that some 
of those planned and ordered may yet be cancelled or delayed. In that 
case, we could be hard pressed to meet our nuclear goal. 

Coal then becomes the fuel of last resort, but this industry is faced 
with serious problems of its o\\ti. On the supply side these include 
questions concerning the availability of trained mine labor, the profit- 
ability of the industr}^ and thus its ability to raise the needed capital, 
and environmental regulations. The latter impact the industry both 
at the mining and consumption ends of the business. On the mining 
side, surface mine and subsidence regulations may inhibit the develop- 
ment of additional capacity, or may introduce sufficient uncertainty to 
cause investors to wait for a clear signpost of what can be expected. 

On the consumption side, many localities have literally regulated 
coal out of the market for environmental reasons. Whether these areas 
are now AA'illing to permit this fuel back in is problematic. Further, the 
full effect of recent "clean air" legislation has not yet been felt, nor 
has the problem of sludge disposal from stack gas scrubbers been 
fully explored. 

As a consequence of the above, there is a strong probability that 
neither coal nor nuclear will be able to fulfill its assigned role. In that 
case, oil imports would burgeon even beyond the substantial quantities 
postulated in the high oil-imports case. 

Economic Impacts 

The question of economic impacts resulting from variations in the 
energy sector is a difficult one. To some extent this interaction has 
been probed by the Energy Modeling Forum. A common set of as- 
sumptions and scenarios were tested on various models. The general 
conclusions of this study were as follows : 

In the presence of constant energy prices, increases in economic activity produce 
similar increases in energy demands, although these may be moderated by trends 
toward less energy intensive products and services. 

Higher energy prices or reduced energy utilization need not produce propor- 
tional reductions in aggregate economic output. There is a potential for substi- 
tuting capital and labor for energy and the contribution of energy to the economy, 
relative to these factors, is small. 

The models do show some substantial reductions in economic output resulting 
from higher energy prices. The magnitudes of these reductions are very sensitive 
to the substitution assumptions implicit in the models. Further, the impacts may 
be large for individual sectors of the economy. 

The benefits of energy substitution may be lost in part if energy scarcity im- 
pedes capital formation. Reduced energy inputs may cause lower levels of invest- 
ment and, consequently, reduce potential GNP. This indirect impact may be the 
most important effect of energy scarcity.^ 

A summary of the output of the various models and their problems 
is contained in appendix I. 

In our case, however, we were not probing the economic reaction to 
variations in energy output so much as the economic response to 
different methods of meeting the demand. Thus, our five scenarios 
were all run through a single model. In reviewing the results one must 
keep in mind the fact that the answers are conditioned by the energy- 
economy relationship built into the model. The numbers derived from 



" Enern,'v Modeling Forum, "Enerjjy and the Economy," Institute for Energy Studies, 
Stanford tJniversity, EMF report 1, September 1977, p. iii. 



17 

the computer should, tlierefore, be regarded in relative terms rather 
than as absolutes. 

Of the five alternative enero,y simulations considered here, the lii^h 
electric case is expected to trenerate the stron<i,est domestic economy 
over the long run; the conservation case is expected to result in the 
weakest economy. Over the 1976 to 1990 period, the averajj^e annual 
rates of growth of real GNP ranged from 2.9 to ;-5.2 percent per year, 
although the components showed greater variations (table li). Reli- 
ance on imported oil, together with relatively strong increases in 
energy demand, would also result in a relatively weak domestic 
economy. As a group, the alternative forecasts indicate that as long 
as energy is available in the forms and quantities assumed in the simu- 
lations, and there are no unforeseen shocks to the system such as the 
1973-74 OPEC price increases, the flexibility of the economy is likely 
to minimize the economic differences flowing from the various energy 
source assumptions. 

TABLE 3— SUMMARY ECONOMIC IMPACTS, 1976-90 

1990 



Conser- High 



High oil 



1976 Base vation electric Domestic Imports 



Real GNP 1 1,364 1,943 1,900 1,962 1,903 1,901 

Growth rate 1 (percent) -.. 3.1 2.9 3.2 3.0 2.9 

GNP: Energy index2 100 98 108 99 107 107 

Real personal consumptions... 819 1,229 1,200 1,236 1,200 1,195 

Manufacturing output 3 305 519 505 533 504 503 

Real gross piivate domestic investment 3 183 305 286 326 287 288 

Netsxpoits^- -9 -30 +14 -20 -8 -35 

Federal deficit or surplus <.. -59 23 14 74 -5 -19 

Unemployment (percent) 7.7 3.3 4.6 3.3 4.5 4.7 

Inflation rate (percent)' 5.1 5.0 5.3 5.4 5.0 4.9 

Savings rate (percent) 6.6 5.1 4.9 4.2 5.2 5.0 

Bond rate (percent).. 9.0 8.5 8.5 9.7 8.3 9.2 

Commercial paper rate (percent) 5.3 6.5 6.6 7.5 6.4 6.3 

1 Average annual. 3 Billion 1972 dollars. 

2 1976 equals 100. * Billion current dollars. 

In this regard, CRS had earlier completed an anah^sis of impacts 
on economic inputs resulting from energy conservation under various 
assumptions pertaining to the flexibility of the econom}^^ 

If the economy has sufficient flexibility to adjust to changes in 
energy use, an 18 percent drop in energ}^ inputs from what would 
normally be expected would result in a 1.2 percent rise in capital and 
a 1.3 percent increase in labor inputs coupled to a decrease of 0.3 
percent in other materials. As a consequence of these shifts GNP 
would only be 0.7 percent below the base. The econom}^ would pay 
a price, however, in terms of greater inflationary tendencies because 
total productivity would be some 3 percent below the base, indicating 
economic ineificienc}'. 

If the economy were relatively inflexible, however, total productivity 
would only be below the base by 1 percent, indicating relatively mild 
inflationary tendencies. GNP, in this case, would be 9 percent below 
the base, with capital and labor inputs 8.5 and 8.8 percent less, 
respectively. 



3 Kaufman, Alvin and Barbara Daly, "Alternative Energy Conservation Strategies : An 
Appraisal" CRS, 77-114S, 45p ; and a revised report entitled "Alternative Energy Con- 
servation Strategies, An Economic Appraisal." 



IS 

The trade-off thus appears to be between economic efficiency and 
reduced economic growth. It should be noted that in the worst case, 
unemplo^TQent would be catastrophic in approaching 14 percent of 
the labor force if wage rates remained constant. 

Employment and Unemployment. — Even though GNP growth is low 
relative to historical rates, unemployment varies from a low of 3.3 
percent of the labor force in the base case to 4.7 percent in the high 
oil imports ca'^e. By today's standards these rates may seem to be 
unachievable given the projected economic growth. There are, how- 
ever, two reasons for the relative!}^ low rate. One is the projected sharp 
decline by Wharton in the rate of growth of the labor force to less 
than 1 percent annually by 1990 compared with well over 2 percent 
currently. Just as the current economic situation is made more difficult 
by the rapid increase in labor supph^ and has prompted many analysts 
to redefine ''full employment" at or above 5 percent unemployment, 
beginning in the 1980's the decline in the rate of new workers entering 
the job market may permit lower overall economic grovrth while still 
achieving ''full emploA^ment." This slower growth in the labor force 
will tend to lower the "full employment" rate of unemployment. 
While the rates of growth of the labor force used in this analysis tend 
to be lower than some, the direction of the change is clear, as is the 
magnitude of its potential impact on the required economic growth 
to achieve and maintain full employment. The slower rate of growth 
of the potential labor force will be offset by continued increases in 
labor force participation b}' women. This has been accounted for in 
the model. 

A second reason for the low unemployment rates derives from the 
definition of labor force and unemplo3^ment. The labor force comprises 
all of those persons who are employed and unemployed. The latter 
are defined as those not working but seeking employment and avail- 
able. As people become discouraged or unavailable, they drop out of 
the labor force and are no longer counted as part of the unemplo3^ment 
problem. 

If we review table 4 we see that U.S. working age population (over 
15 years old) remained constant in all five energy cases, but labor force 
varied by as much as 1 million people. If these persons are added 
back into the ranks of the unemployed, the rate would be approxi- 
mately 1 percentage point higher or 5.7 percent in the high import 
case. Employment will var}- between a low of 110 million persons in 
that case to a high of 112.7 million in the high electric case. The latter 
can produce 2.4 million more jobs than the conservation case, but 
approximately the same emplo3^ment level as the base case. 

TABLE 4.-EIVIPL0YMENT AND UNEMPLOYMENT IN THE UNITED STATES, 1977-90, BY ENERGY SCENARIO 

(Millions of people) 

1977 1980 13S5 1990 



Population ever 15 yr old. 
Civilian labor force: 

Base 

Conservation 

High electic 

High oil - Domestic 

High oil— Imports... 
Employment: 

Base._ 

Conservation 

High electric 

High cil- Domestic. 

High oil— Imports... 



161.0 


1G8.0 


177.0 


1S4.0 


97.2 


103.7 


110.7 


116.5 


97.2 


103.7 


110.4 


115.6 


97.2 


103.7 


110.5 


116.5 


97.2 


103.7 


110.6 


115.8 


97.2 


103.7 


110.4 


115.5 


90.6 


98.2 


106.8 


112.6 


90.6 


97.7 


104.9 


110.3 


90.6 


97.6 


106.6 


112.7 


90.6 


98.2 


105.6 


110.5 


90.6 


97.8 


104.6 


110.0 



19 

Inflation. — It, therefore, is possible that in tlie 1980's, when the 
rate of labor force increase is once again down to close to 1 percent per 
year, not only will lower rates of economic growth be suitable, but 
inflationary pressures associated with tight labor markets (under 
percent unemployment) may subside as well. 

The present estimates of inflation through 1990 are largely a result 
of upward price pressures already built mto the economic system, 
and additional pressures brought about by increasing energy costs. 
The energy prices (table 1) were developed to generate the particular 
energy mix desired and do not necessaril}^ reflect potential develop- 
ment costs. It is quite likely that the development of synthetic fuels 
(?;, n fuels) will require considerably higher prices than implied here 
because of higher development costs. For the purposes of our analysis, 
it is assumed that the current rate of investment in research and de- 
velopment in the syn fuel case will generate the necessary production 
at the assumed prices. 

If energ}^ prices increase more rapidly than assumed, the rate of 
inflation would undoubtedly be higher. Even more importantly, the 
rate of economic growth could be slower, and there would be greater 
unemplo^^ment than would otherwise be the case, unless all of the 
spending on energy is recycled back into the economy. As energy 
prices increase, the resulting economy w^ould move toward that 
described by the conservation alternative. 

xls expected, the economy would suffer with the highest inflation 
rate in the high electric case, and the lowest in the high oil imports 
case. The conservation case is a close second to the high electric case. 
The latter results in more inflationary pressure because of the higher 
levels of economic activity and higher oil and natural gas prices 
required to produce the desired level and type of electric generation, 
despite a postulated decline in the price of electricity. The inflation 
forecast is also affected by the higher interest rates that are brought 
about, at least partly, by increased investment spending in the electric 
case. It is possible, however, that this could be offset by selected 
monetary and fiscal policies. If methods can be found to achieve 
conservation without having higher effective prices for energy, the 
inflation rate would be correspondingly lower. 

Investment. — If the policies indicated above are successful in reducing 
interest rates, it is likely that investment spending would be somewhat 
higher and the overall level of economic activity greater than esti- 
mated. The projected higher inflation rate, together with the relatively 
low level of unemployment, also causes federal tax receipts to swell, 
resulting in a projected Federal budget surplus in excess of $70 billion 
in 1990 in the high electric case. As a result of this surplus, the model 
generates a relatively low rate of private saving so that the Govern- 
ment, in effect, is providing most of the savings in the economy. This 
also occurs, but to a lower degree, in the conservation and base cases. 
If Congress acts to maintain stable average tax rates, limiting the 
accumulation of a budget surplus, there v/ould be some additional 
economic stimulus; but this stimulus would be largely offset by an 
increase in the individual savings rate which would reduce private 
consumption. 

It is clear from the model that the most important econoinic stimulus 
comes from the increased levels of investment in the high electric 
case (table 5). Even though the electric utility sector in that instance 





Conser- 


High ' 


High oil 








Base 


vation 


electric 


Domestic 


Impjrts 


298 


278 


318 


280 


279 


58 


59 


60 


58 


57 


240 


219 


258 


222 


111 


60 


60 


58 


60 


60 


32 


32 


30 


32 


32 


50 


47 


50 


48 


48 


35 


33 


34 


34 


34 


43 


28 


66 


30 


31 


39 


24 


62 


26 


27 


4 


4 


4 


4 


4 


35 


34 


35 


33 


33 



20 

requires more funds than in any of the other alternatives, the economy 
in general responds with increased investment in all areas; this require- 
ment would be largely financed through higher corporate profits until 
1985, and after that date by Government saving. 

TABLE 5.— ESTIMATED FIXED INVESTMENT BY SECTOR, 1976-90 
[Billions of 1972 dollars] 

19S0 



1976 

Fixed investment. 177 

Residential 55 

Nonresidential 122 

Commercial and other 

Transportation and communication 

r/ianuiacturing, durables 

Manufacturing, nondurables 

Utilities 

Electric 

Gas and water 

Farming and mining 

The lowest investment occurs in the conservation case, with the 
major drop in the utilities sector. The two high oil cases tend to be in 
the middle, again as a result of lower utility investment compared 
with the base case. In this regard, we would note that investment in 
the high oil domestic case would be close to that in the electric case 
with the mining sector absorbing substantial sums for syn fuel de- 
velopment. As a result of the way in which the case was computed, 
this impact does not occur. 

The investment distribution through the various sectors tends to be 
mrearkably similar in each case except for the utility sector. 

Personal Consumption. — Personal consumption expenditures would 
be highest in the high electric case (table 6) and lowest in the high 
oil-imports case. Regardless of the case selected, however, services 
are the major expenditures sector, followed by nondurable goods. The 
importance of the services sector results, to some extent, from heavy 
expenditures for electric utiUty services. From the point of view of the 
homeowner most of the benefits of increased personal consumption 
expenditures are likeh' to be eaten up by higher household operating 
expenses. In 1990, high electric assumptions would result in approxi- 
mately 4.5 percent of the total personal consumption expenditures 
being spent on heating, gas and electricity, compared with 3.3 percent 
in 1977; these expenditures would account for 4 percent in the base 
case. In the conservation and high import cases the heat — gas — electric 
percentage would only increase to about 3.5 percent. The higher level 
of overall economic activity projected undei- the high electric assump- 
tions should generate sufficient personal income so other categories of 
consumption are not lowered by the higher heating and utility expendi- 
tures. This level of consumption spending, however, could not be 
maintained if the personal saving rate was not unubually low as an. 
offset to the large Federal budget surplus. 



21 



TABLE 6— ESTIMATED PERSONAL CONSUMPTION EXPENDITURES, 1975 90 
[Billions of 1972 dollarsi 

1990 



High oil 



Conser- High 

1976 Base vation electric Domestic Imports 



Personal consumption expenditures 819 1,229.0 1,200.0 1,236.0 1,200.0 1,195.0 

Durable goods 118 204.0 199.0 204.0 199.0 198.0 

Nondurable goods 334 480.0 472.0 478.0 471.0 469.0 

Services 357 545.0 529.0 554.0 529.0 528.0 

Heating oil and coal 5.5 5.4 4.8 5.6 5.5 

Electric utility services 38.0 32.0 45.0 33.0 33.0 

Gas utility services 5.2 4.8 4.7 4.8 4.7 

Foreign Trade. — In all of the cases considered in this paper, with 
the exception of the conservation case, the balance of trade as meas- 
ured by net exports is in favor of other countries measured on a current 
dollar basis (table 7). Onl}^ the conservation case has a positive balance, 
and this despite the fact that the high electric case has a lower energy 
import requirement. The conservation case results in the highest 
level of total exports and lowest total imports of any of our five cases. 

TABLE 7.-EXP0PTS AND IMPORTS, 1990 
[Billions of dollars] 

Case Exports Imports Net exports 

Base... - 

Conservation 

High electric 

High oil— domestic... 

High oil— imports.. -.. 

This occurs because total imports, and to a lesser degree exports, 
are more closely alined with overall economic activity than with the 
volume of oil imported. Further, the electric case involves greater 
imports of finished manufactured .eoods which could result in enhance- 
ment of the U.S. standard of living as a result of increased foreign 
trade. 

Even though the high electric case is expected to generate the fastest 
increase in the total value of imports of the five alternatives, any 
negative implications are lessened by the fact that this increase is 
generated by a stronger domestic economy than in the other cases and 
not because of increased oil pa}Tnents. In this simulation, exports 
increase at a somewhat slower rate leading to the development of a 
trade deficit from 198S onward. In the long run, however, the inter- 
national payments system would adjust, reducing the rate of increase 
in manufactured imports and increasing exports. The net result would 
be for a stronger U.S. economy in the long run. 

The major trade deficit occurs in the high oil imports case. In this 
instance, as a result of the large amounts of U.S. dollars going abroad 
to pay for oil imports, foreign consumers are able to make increasing 
claims on U.S. production. While this automatic adjustment process 



5i0 


570 


-30 


548 


534 


+ 14 


547 


567 


-20 


544 


552 


_o 


540 


575 


-35 



22 

can keep the U.S. economy running at reasonably full employment, 
the long term benefits accrue to the oil exporters. These benefits are 
all the larger because the terms of trade (relative to prices of traded 
goods) have moved to the disadvantage of oil importers. 

The above estimates are, of course, dependent on the assumptions 
fed into the model as noted earlier. In the case of the external sector, 
however, this may be even more so in the sense that additional vari- 
ables are involved. For example, if the pattern of prices assumed are 
different then the answer will be different. This is particularly critical 
siDce imported energy prices are not set by the market, but by a cartel 
operating under political as well as economic guidelines. 



APPENDIX 



Other Energy Models 
Introduction 

In the preceding pages, CRS — using the Wharton Annual Energy 
model — has attempted to assess the impact of alternative energy 
futures on our economy. We thought that it would be a useful addi- 
tion to the CRS paper to describe the way several of the other models 
work and what they are equipped to do regarding energy. The short 
summar}^ of various models which follows is based almost solely on 
''Modeling Energy-Economy Interactions: Five Approaches." ^ This 
book contains papers presented in May 1977, at a Joint National 
Meeting of the Institute of Management Sciences and the Operations 
Research Society of America. The modelers whose works are presented 
here were encouraged to the extent possible to follow a set of common 
assumptions regarding resource availabilities, the substitutability 
of other factors of production and goods and services for energy, and 
possible constraints on the use of coal and nuclear power. For the 
most part other assumptions are based on the CONAES (Committee 
on Nuclear Alternative Energ}^ Systems) Modeling Resource Group's 
base case GNP assumptions. 

Four scenario runs were made through each model as described 
below : 

(1) Ue: Unconstrained development of resources and 0.75 elasticity 
of substitution ; 

(2) Ce : Constrained development of resources and 0.75 elasticity of 
substitution ; 

(3) Ui: Unconstrained development of resources and 0.25 elasticity 
of substitution ; and 

(4) Ci: Constrained development of resources and 0.25 elasticity of 
substitution. 

In the unconstrained cases, domestic oil and natural gas are ex- 
hausted but large quantities of electricity are produced by coal and 
nuclear power plants. In the constrained cases, the use of coal and 
nuclear power is subject to substantial constraints. 

The models dealt with here are all long range models ''exploring 
rather gradual changes over decades." This long range feature can be 
seen as a plus or minus depending on one's point of view. Admittedly 
the long range (to 2000 and beyond) future is almost impossible to 
foresee (especially as one considers the difficulty of forecasting even 
the short-range future today), but the models are useful in showing 
the long-range consequences of possible actions we might take in 
the near future based on the best available information. 

The choices taken regarding energy poKcy should at least be geared 
in a certain direction; the models, by testing the various scenarios, 
help to indicate the path the policymakers should take, based on a 
future as seen from the perspective of today. 

1 Hitch, Charles J., ed., "Modeling Energy-Economy Interactions: Five Approaches," 
Resources for the Future, Washington, D.C., 1977, 303 p. Research Paper R-5. 

(23) 



24 
ETA-Macro 

The ETA-Macro model is designed to estimate the extent of two- 
way hnkage between energy and the U.S. economy. It tests the re- 
lative strength of the linkage as it responds to new technologies and 
other changes in energ}^ supply (real or contrived). The degree to 
which one accepts or rejects this model depends on one's opinion of 
the "elasticity of substitution'^ between energy and other inputs 
to the economy. The proponents of this model believe energy demand 
to be relatively inelastic. Thus if one feels cost effective conservation 
is relatively easy, one would probably not utilize this model. 

ETA-Macro is a single integrated model based on two submodels: 

(a) ETA, a process analysis for energy technology assessment; and 

(b) a macroeconomic growth model providing for substitution be- 
tween capital, labor and energy inputs. 

For an overview of ETA-Macro see figure 1. 
This model assumes the following : 

(1) The impending exhaustion of oil and gas resources — and a transition to 
new supply technologies over the next 20-50 years; 

(2) Price induced conservation — that is, the possibility of substituting other 
economic inputs in place of energy; and 

(3) The effects of rising energy costs upon the accumulation of physical capital 
in future time periods. ^ 

In order to focus upon the energ}^ sector, the economy is generally 
described in highly aggregative terms. Within the energy sector only 
two categories are distinguished — electricity and nonelectric energy. 

For the economy wide results this model depends upon four inputs: K,L,E,N — 
respectively capital, labor (measured in efficiency units), electric and nonelectric 
energy. Assumptions regarding these inputs are as follows: 

(a) There are constant returns to scale in terms of these four inputs ; 

(h) There is a unit elasticity of suVjstitution between one pair of inputs — capital 
and labor; 

(c) There is a unit elasticity of substitution between the other pair of inputs — 
electric and nonelectric energy; and 

(d) There is a constant elasticity of substitution between these two pairs of 
inputs. 3 



NATURAL RESOURCES 
(PETROLEUW. NATURAL 
GAS. CCWJl., URANIUM. 
HYDROELECTRIC, tAc.) 



LABOR <L) 



ENERGY 
COWERStON 
TECHNOLOGIES (LIGHT 
WATER REACTORS, 

SOLAR 

ELECTRICITY 
PLANTS, 
COAL -BASED 
SYNTHETIC 
FUELS, tic.) 



... } 












ETA 


ELECTRIC, NON-ELECTRM^ 


MACRO 

GROSS 
OUTPUT (Y) 


CONSt>MPTK)N J^) 


ENERGY (E.N) 




EfJERGY COSTS (EC) 


INVESTMENT (I) 








, 





CAPrrAL(K) 



FIGURE I. AN OVERVIEW OF ETA-MACRO 



» Ibid., p. 2. 
» Ibid., p. 5. 



25 

The four sets of assumptions being tested in the models presented 
here revolve around various degrees of a nuclear growth policy. The 
ETA-Macro model results are as follows: 

Under base case assumptions prior to the year 2000 (for the most 
part provided by the CONAES Modeling Resource group) the macro- 
economic effects would be negligible, however after that year they 
are projected to be substantial. An annual GNP loss in 2010 of $100 
billion is possible. It must be noted that although this number is 
large absolutely, it is a relatively small amount of projected GNP 
(3 percent). 

According to this model the crucial economic parameters for U.S. energy- 
policy are the elasticity of substitution between energy and other inputs — to- 
gether with the rate of growth of the labor force and of its productivity at constant 
energy pi-ices. These are the parameters that appear to dominate the long term 
growth picture.* 

This model looks at the big picture, the macro impacts. It is not suit- 
able for analyzing specific proposals for energy conservation within 
specific sectors. Other models are designed to give that kind of delinea- 
tion. 

The ETA-Macro model in this exercise thus aids us in assessing the 
pluses and/or minuses of following or not following a nuclear growth 
policy. Is it reasonable to accept slower economic growth as the price 
of eliminating possible nuclear hazards? The options as perceived 
through the ETA-Macro model are presented, it is left to the policy- 
makers to decide. 

DESOM-LITM (Brookhaven/DRI) 

The second model to be discussed is also composed of two separate 
models: the Data Resources, Inc. (DRI) Long Term Interindustry 
Transactions Model (LITM), and the Brookhaven National Labora- 
tory (BNL) Dynamic Energy System Optimization Model (DESOM). 
In this system ''a small macro-model (four sectors plus six energy 
sectors) is used to drive a larger interindustry model which in turn 
determines the many end use demands in DESOM." ^ Figure 2 depicts 
the processes of this model. 

The BNL DESOM focuses on the end use demands for energy attempting to 
find the cheapest way of meeting them. The model contains only limited ability 
to substitute other inputs for energy, but gives a detailed picture of the appropriate 
fuel mix for a given level of end use demands. In this study, the DESOM model is 
linked to the DRI-LITM model, which, in turn, models the substitution which 
occiu's between energy, capital, labor, and four types of materials as a result of 
changes in relative input prices. ^ 

Like the other models this model has many exogenous plug-ins 
resulting possibly in the output being determined more by the person 
making the run than the model itself. 

Of the models discussed in this appendix, this one seems to have 
departed most from the CONAES assumptions. The /'alternative 
energy form" concept which refers to a possibly unpredicted energy 
source (in amount or kind), and associated EMF values are not em- 
ployed, since the DESOM-LITM model incorporates: 

* Ibid., p. 28. 
5 Ibid., p. 285. 
« Ibid., p. 280. 



26 

Variables representing most of the potential alternative energy supply and 
conservation technologies, including a wide variety of sjmthetic fuel, solar, and 
conservation technologies (heat pumps, electric cars, etc.). Also, the ''elasticity of 
substitution of energy for nonenergy" is not parameterized upon, since, in the 
context of the system of models used, the elasticity is determined endogenouslyJ 

As other models also show, the quantity of energy consumed during 
the early period (thru 2000) does not differ greatly among the four 
scenarios, reflecting the long life of already existing capital equipment 
and end use devices. However in the post 2000 period great divergence 
among the scenarios results. 

Lester Lave in the same book criticizes this model as perhaps trying 
to do too much with too many unanswered explanations. Lave also 
appears to be hesitant regarding the way in which the micro model 
seems to predominate the macro modelj 

INTEGRATED BW./ORI MOOCL FOR LON« TERM 
ENERCY/ ECONOMIC /EMVIRONMENTAL ANALYSIS 



N«f 



lm,?ofti of Eftgffly 



toti on Lf yg-Ht end Oil Cort» 
Pf3iJcTrv I i y YfWKh JH 



Can$«eft)on cf 0oR«»8t(c 



TrQnef>rr.'>otM« 



EneiTy Pnist (fc/Stv) [ 



L*eat Coot Mia o? Eiwey Su#- 
plfi* end Ca!r>«niia» Cct^tecttiw 



^ Enyircninsirtol Ear^ttuMW 



ORI 
Long T%rm Mminiu*^ 
TronMOfiow Mo<M 



rvMl 



(4) 



$«ctorel ontf Aggr*fiot3 Energy 



^ 



SNL 



SNL 

DCSCM 



(8f«'t of •e'vMjs Cisco) 



C(Mtf«cn« 



Figure 2 



Resources for the Future 

The RFF/SEAS (Resources for the Future, Strategic Environ- 
mental Assessment System) is a system of interlinked models, the 
core of which is the University of Maryland's dynamic input-out])ut 
model of the U.S. economy, INFORUM. This' model is one which 
requires the modeler to make many assumptions not only in the 
beginninir but throughout the run. In this way the model becomes 
highly subjective. The model is large, depicting 185 sectors. The 
end focus of this mcnlel is the onviroiuneiit and it produces monetary 
estimates of environmental quality for each year. 

In all cases run through this model net energy consumption grows 
less rapidly than GNP and the net Btu/GNP ratio falls. Most of the 
results are what would ])robably be expected. Coal ])roduction in- 



Ibid., p. 4G. 



27 

creases quite rapidly in the iiiiconstraiiied cases. The shift away 
from electricity to other fuels is most prominent in the constrained 
cases due to the assumed ban on new nuclear development and limits 
on coal production. 

Four difl'erent measurements of environmental impacts have 
been developed: pollution residuals, land disturbed, pollution abate- 
ment costs and pollution dama<2:e costs. These results are summarized 
through a welfare index by subtracting per capita environmental 
damage estimates from per capita consumption figures. Table A pre- 
sents these computed welfare indices as they appear in the text 
of the RFF paper. 

TABLE A— CONSUMPTION PER CAPITA LESS ENVIRONMENTAL DAMAGES PER CAPITA (1972 DOLLARS) 
Scenarios 1975 1985 2000 2020 2025 

A. Unadjusted estimates: < 

U75. 2,947 

U25 2,947 

C75 2,947 

C25 2,947 

B. Estimates adjusted for labor productivity losses: 

U75 2,947 

U25 2,9^7 

C75 2,947 

C25 2,947 

C. Estimates adjusted for labor productivity losses and savings 
constraint (Elasticity =0.3): 

U75.. 2,849 

U25 2,849 

C75 2,849 

C25 2,849 

D. Estimates adjusted for labor productivity losses and savings 
constraint (GNP from model): 

U75.... 2,849 

U25 2,849 

C75 2,e49 

C25 2,849 

1 These estimates have been scaled to eliminate the minor differences in the GNP projections that occurred in the model 
runs due to targeting. 

As these numbers indicate : 

The more difficult of the energy scenarios generate signiJBicant losses only in the 
cases where a savings constraint is applied. Without such a constraint the economy 
appears flexible enough to take quite sizable shocks to the energy sector in its 
stride. 8 

The RFF modelers note that their model restiictions may be 
severe — tiie demand for energy is jDrobabl}^ too high, there is the 
possibility of a relaxation on constraints to coal use hi the long run, 
stockpiling of oil imports may be looked upon as a sounder policy than 
restricting imports, etc. Thus smaller aggregate welfare losses are 
indeed possible. 

However, the m.odelers also suggest that by emphasizing aggregate 
losses one overlooks the energy interactions as the}' aflect individuals. 
These include such things as income and wealth distributions am.ong 
persons, factors of production and geographic regions. Other factors 
not considered in the model involve safety, security, and some en- 
vironmental consequences which are difficult, if not impossible, to 
quantify. The RFF modelers themselves admit that the very items the 
model can not deal v;ith quantitativel}^, such as safety and national 
security, may 'Svell rule the day" when it comes to decisions by 
policymakers. 

8 Ibid., p. 171. 



4,156 


6,236 -, 
6,134 .. 
6,202 .. 
6,114 ., 




9,714 


4,110 
4 128 




9,513 
9 390 


4,044 




9,063 


4,110 
4,102 
4,083 
4,035 


6,136 
6,122 
6,102 
6,090 


8,874 
8,820 
8,567 
8,440 


9,559 
9,494 
9,183 
9,027 


4,182 
4,167 
4,159 
4,100 


5,631 
5.555 
5,507 
5,275 


8,729 
8,473 
8,177 
7,911 


9,503 
9,203 
8,845 
8,570 


4,065 
4,051 
4,017 
3,892 


4,553 
4,410 
4,210 
3,845 


7,759 
6,942 
6,412 
4,952 


8,560 
7,575 
6,963 
5,229 



28 

lEA 

The lEA (Institute for Energy Analysis) general equilibrium twa 
sector energ\' demand model as developed by David B. Reister and 
James A. Edmonds provides long term forecasts of energ}'- demand and 
GNP. According to the modelers, this model can be used to study 
questions such as: the economic impact of the transition from inex- 
pensive energy sources to more expensive energ}" sources; the con- 
sequences of modif^dng the historical relationship between growth in 
the GNP and growth in energy; or the impact of large increases in the 
price of energ}^ on economic growth.^ 

The IE A model is based on five theoretical assumptions: 

A. 1. The economy can be characterized by two sectors: energy and materials. 

A. 2. The two fmidamental factor inputs to the economy are capital and labor. 

A. 3. Energy is used only as an intermediate good. 

A. 4. The materials sector is homogeneous of degree one in its inputs of capi- 
tal, labor, energy, and materials, and is assumed to be perfectly competitive (that 
is, a douljling of all inputs leads to a doubling of all outputs). 

A. 5. The energy sector is not homogeneous of degree one but is characterized 
b}'" decreasing returns to scale, and is assumed to be imperfectly competitive. ^° 

The authors refer to the model as a parametric (versus econometric) 
model because the theoretical structure of the model and the values of 
the parameters which control the model have been determined b}^ 
assumption and not by econometric methods. The major assumptions 
plugged into the model are then just that — assumptions. Models treat 
the assumptions as fact — thus the source of error is not the model but 
the degree to which we cannot see the future. 

According to the results of this model, reduction in energy demand 
(based on the given assumptions) does not require an equal reduction 
in GNP. These runs also indicate that ''substantial" energy conserva- 
tion is possible in the elastic case. ''Since fewer resources are needed 
to produce energy the elastic case provides more GNP for both the 
free supply and constrained suppl}^ assumption." ^^ 

The lEA model gives great attention to demographic changes. It is 
this that tends to lead to lower growth rates for energy use in this 
versus the other models. 

The authors conclude that the transition from cheap energy to 
expensive energy will have a substantial but not catastrophic impact 
on GNP, even for the case with tight coal and nuclear constraints. 
Furthermore, the impact is substantially reduced if the economy can 
freely substitute one factor of production for another. 

Lester Lave, in his critique finds this model, like ETA-Macro, 
"aggregates the 95 percent of the economic activity (which is other 
than energy) into a few sectors, while displaying detail on the energy 
jjortion." Lave also finds fault with the energy pricing mechanism. 
"* * * The authors decided to treat energy pricing simply and to 
set price equal to average (versus marginal) cost * * * It means that 
energy prices are biased downward * * * and thus that energy use 
is likely to be biased upward." He concludes that one must approach 
results of such a model with great caution. ^^ 

» Ibid., p. 199. 
1" IbUl., p. 200. 
" Ibid., p. 20:'.. 
" Ibid., pp. 285-6. 



29 



UNIVERSITY OF FLORIDA 




1262 05602 3814 



The Scenarios 

The table below presents a brief characterization of the four sce- 
narios run by each model. Primary ener^}^ use is shown in cpnids — 
prices of petroleum, natural gas and electricity in dollars per million 
Btu or index numbers. Total consumption in the economy is shown in 
billions of dollars (using various years as a base). Although the 
numbers a})pear to be comparable, Hitch notes this is not always 
possible and is done only at the reader's own risk. 

As was noted earlier there is little variance in primary energy use 
across the models and scenarios through the year 2000; however, 
this changes considerably between 2000 and 2020 since the constraint 
on resources is binding. Perhaps more important is that total con- 
sumption in the economy in billions of dollars varies little across 
the four cases even w^hen extended through 2020. This seems to imply 
a great flexibility in the economy wdien it is given sufficient time 
to adjust. 

COMPARISON OF MODELS 



1975 



Ue 



Scenario 



2000 



Ce 



Ui 



Ue 



2020 



Ce 



Ui 



Primary energy use: 

ETA-Macro-. 

DESOM-LITM 71 

lEA 71 

RFF 77 

Price of liquids: 

ETA-Macro- 0.80 

DESOM-UTM.... 2.26 

lEA (index number) 

RFF... 3.64 

Price of natural gas: 

ETA-Macro- 0. 80 

DESOM-LITM 2.50 

lEA (index number) 

RFF.. 1.29 

Price of electricity: 

ETA-Macro 3. 22 

DESOM-LITM... 10.51 

lEA (index number) 

RFF.... 7.91 

Consumption: 

ETA-Macro 1 

DESOM-LITM 770 

lEA (1967 dollars) 490 

RFF... 678 

RFF with savings constraint (Elas- 
ticity equals 0.3) 678 

RFF with savings constraint (GNP 

from model)- 678 

C/pop less environmental dam- 
age— RFF 2,947 



107 104 126 
139 

"134 lie' 149 

124 112 171 

2. 70 2. 80 3. 30 

3 25 

"2."67""2."67" 2.' 59 

5. 10 5. 70 5. 10 

2. 70 2. 80 3. 30 

3 52 

"i.'79""2."84" 2." 17 

4. 54 4. 30 4. 54 

6. 36 6. 80 6. 48 

10.06 

1.27 1.39 1.56 

8. 30 9. 50 8. 30 

2, 795 2, 790 2, 763 

_.. 1,808 

1,511 1,457 1,484 

1, 663 1, 668 1, 649 

1,530 1,512 1,500 

1,248 1,171 1,200 

6, 136 6, 102 6, 122 



118 151 119 192 165 

112 195 134 

141 

148 203 148 292 232 

3.30 5.00 5.00 5.00 5.00 

4.27 4.95 11.46 

4.10 

9.47 5.17 9.47 5.17 9.47 

3.30 5.00 5.00 5.00 5.00 

4.54 5.24 12.58 

5.42 

8.84 4.54 8.84 4.54 8.84 

9.88 6.68 11.87 7.21 11.75 

16.24 10.49 15.37 

1.65 

15.61 8.70 15.61 8.70 15.61 

2,757 4,375 4,304 4,244 4,109 

1,727 2,928 2,297 

1,365 

1,633 2,652 2,586 2,650 2,492 

1,419 2,609 2,471 2,548 2,336 

1,044 2,324 1,952 2,096 1,466 

6,090 8,874 8,567 8,820 8,440 



» Includes private consumption plus government. 

Ue: Unconstrained development of resources and 0.75 elasticity of substitution. 
Ce: Constrained development of resources and 0.75 elasticity of substitution. 
Ui: Unconstrained development of resources and 0.25 elasticity of substitution. 
Ci: Constrained development of resources and 0.25 elasticity of substitution. 



Electricity prices, as one would expect, show substantial differ- 
ences between the constrained and unconstrained cases w^hen drawn 
out to 2020. This indicates that: 



30 

The variation in resource availability is more important than the variance in 
the elasticity of substitution. When the constraints on coal, oil shale, and nuclear 
reactors are lifted, the value of the elasticity of substitution makes little difiference. 
Thus if we can learn either to mine and burn these fuels cleanly, or learn to live 
with a polluted environment, there is little indication of an energy problem in the 
United States by 2020. However, the combination of constrained resources and a 
low elasticity of substitution indicates an energy problem by 2020. ^^ 

Conclusion 

The models and scenarios indicate there are two main questions — 
the first is the elasticity of substitution, and the second is the extent 
to which energy is expected to be curtailed. Without a more definite 
handle on elasticity, the credibility of basing decisions on model results 
is subject to question. To a degree the elasticity problem is a product 
of an uncertain regulatory framework. If this were more definite, the 
choices would be clearer, and the substitutions that had to take place 
in the long run, would. This seems to imply that the economy could 
adjust in good stead over the long run, given free market price signals. 
By not allowing the economy sufficient time to adjust as mandated by 
''correct" price signals, Government policies which appear to some in 
our best interests now, ma}^ prove detrimental in the long run. The 
bottom line is that the economy must have sufficient time to adapt to 
changing situations in order to avoid possible severe consequences. 

The foremost conclusion of the model comparison exercise has been 
the relative agreement that energy and economic activity need not be 
so directly tied as long as the economy and society has sufficient 
leeway and time to adjust. 

Note. — This appendix is presented as a brief outline of the models, 
to aid the reader in becoming more aware of other energy-economy 
models. It is a ''state of the art" assessment. The book "Modeling 
Energy-Economy Interactions: Five Approaches" as cited earlier, 
gives a much more comprehensive view of the models we speak of here. 



"Ibid., p. 290. 

o